Do Tariffs Change the Investment Case for International Diversification?

When tariffs dominate the headlines and businesses adjust to higher costs of imported goods, you’re likely to have urgent questions about their portfolios. Should you increase or maintain your holdings of international stocks and bonds when trade barriers rise?

For years, financial advisors have recommended allocating at least 20% of portfolios to international investments. However, in today’s environment of trade tensions and policy shifts, investors need to consider whether a new approach is needed.

The Traditional Case for International Diversification

Vanguard recommends investing at least 20% and, for many, closer to 40% of your overall portfolio in international stocks and bonds for the best diversification mix. While a major study a decade ago found that American 401(k) plans had an average of just under 18% of their portfolios in international securities, recent data from Empower puts those numbers far lower:

“Although the benefits of investing internationally are widely accepted, many U.S. investors are still hesitant to invest abroad, primarily because they believe it is much riskier to invest overseas,” noted Scott Abernethy, regional director for private asset management at TIAA in one of its pieces on diversifying internationally. “In our assessment, an [international] allocation in the 35% to 40% range provides the potential for increased diversification and improved risk-adjusted return.”

Abernethy and other experts believe that when your investments span different countries and economies, you’re protected if any single market faces trouble. So, for example, if analysts are expecting the U.S. markets to tumble, investments in Europe or Asia might remain stable or even grow, helping to smooth out your overall returns. That’s exactly what generally occurred after the U.S. announced new tariffs in 2025.

Increases in tariffs do make this picture more complex overall. Rather than abandoning international diversification during trade disputes, historical and more recent patterns suggest that global exposure might be even more valuable as a hedge against policy-driven market swings.

How Tariffs Impact Different Markets

Industries more dependent on cross-border supply chains, like automotive manufacturing, typically face the greatest disruption when tariffs rise. A 25% tariff on imported components can significantly increase production costs, potentially raising consumer prices and squeezing profit margins. Similarly, food importers and retailers often face higher costs when agricultural tariffs rise, with cheaper post-tariff alternatives usually taking time to develop.

Meanwhile, certain sectors are often relatively insulated from these effects. Financial services, healthcare, and companies primarily serving domestic markets typically face fewer immediate challenges. Meanwhile, multinationals often face a complicated calculus in which they might come out ahead. For example, as tariffs were announced in 2025, an S&P Global report noted that Archer Daniels Midland Co. (ADM) “could face lower grain and oilseed shipment volumes to Mexico because of tariffs,” but its prognosis was generally favorable because “the company … has the scale and logistics infrastructure to benefit from trade flow disruption.”

What You Can Do When Tariffs Are Rising

When tariffs create market uncertainty, here are specific actions to consider:

1. Maintain your target allocation: Focus on your long-term international exposure goals (20% to 40%) rather than trying to time the market. If you’ve drifted below your target, gradually rebalance.
2. Prioritize quality: Select international investments with strong balance sheets, stable earnings, and pricing power. Dividend-paying international stocks can provide both stability and growth potential.
3. Diversify with bonds: Vanguard recommends keeping about 30% of your fixed-income allocation international.

Remember that tariffs, while disruptive in the short term, rarely change the fundamental long-term case for global diversification. Markets move in cycles, with international markets sometimes outperforming U.S. markets and vice versa.

The Bottom Line

The fundamental case for global exposure doesn’t change with tariffs rising. Historically, international markets often outperform the U.S. during different economic cycles, providing portfolio stability through diversification. Many experts advise maintaining your international allocation with an emphasis on quality companies that can weather tariff-related disruptions.